How Competitive Forces Shape Strategy

Michael E. Porter

A Harvard Business ReviewMarch 1, 1979

Competition Beyond Other Players

• Competition is not limited to the other players in the market.

• Michael E. Porter has identified 5 competitive forces:–Threat of Entry–Bargaining power of suppliers–Bargaining power of consumers–Threat of Substitute–The industry (competitors)

Threat of Entry

• The six barriers to entry are:–Economies of Scale–Product Differentiation–Capital Requirements–Cost disadvantages independent of

size–Access to distribution channels–Government Policy

Bargaining Power of Suppliers

• Strength of suppliers depends on:–Concentration of Supplier group–Product differentiation and

switching cost–Competition from other suppliers–Forward Integration of suppliers–Relative importance of the

consumer to the supplier

Bargaining Power of Buyers

• Strength of buyers depends on:–Concentration and Volume of

Purchases–Availability of Alternative Suppliers–Relative Importance of the product

purchased–Cost related to the risk of error–Backward integration of buyers to

make industry’s product

Threat of Substitutes

• The threat of substitutes depends upon:–Price performance tradeoff with the

industry's product – Increase in competition and

performance improvement.

Jockeying for Position

• Various factors affect the existing rivalry in the industry:–Number of Competitors – Industry Growth–Product differentiation–Exit Barriers–Switching Cost

How to formulate Strategy?

• Positioning of Company• Influencing the balance• Exploiting industry change

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